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5 Benefits of a Cash Flow Forecast

By 06/01/2022February 18th, 2022No Comments
Direct Peak Cash Flow

There are so many plates to spin as a small business owner, but none probably more important than cash flow as you can only run out of cash once. Read on to find out the benefits of a cash flow forecast.

In this article you’ll find out:

  • What is a cash flow forecast
  • The benefits of a cash flow forecast
  • How to build a cash flow forecast
  • How to leverage technology to automate cash flow forecasting.

Let’s go!

What is a cash flow forecast?

 

A cash flow forecast is a report that predicts your business’ bank balance over a set period of time. I would generally recommend that a business runs two types of cash flow forecast:

  • 12-month forecast broken down into monthly periods
  • 13-week forecast broken down into weekly periods.

The 12-month cash flow forecast will give you a “big picture” overview of your company’s cash for annual planning.

The 13-week cash flow forecast gives you a much more detailed view of your cash and helps with the immediate to short term cash planning.

What are the benefits of a cash flow forecast?

 

1. You know if you are going to run out of cash and can make plans

An effective cash flow forecast can quickly identify if the business is going to have any cash shortages. This is vital for business planning as you will be able to put a plan in place to ensure this doesn’t happen. 

A few actions that you may take if your cash flow forecast shows you’re going to run out of cash:

  • Employ a better credit control system to ensure debts are paid faster
  • Arrange for some business finance to inject cash into your business
  • Speak to suppliers to see if you can temporarily agree to longer payment terms.

Having this foresight could be vital to the survival of your business if cash is tight. Once you’re past this point, you can put in place a roadmap to ensure cash flow is never a problem again.

2. Make key decisions on allocating your cash surplus

Although it may seem rare that your business will have excess cash on hand, a forecast will help you identify if this will be the case and when you will achieve it. As long as the forecast is as accurate as possible you will also know roughly how much of a cash excess you have.

Once you have this information, you can make some key decisions on where to invest this money. 

Here are a few actions you may wish to take on investing excess cash:

  • Repay outstanding loans in order to save on the interest charges
  • Invest in business growth opportunities
  • Issue dividends to shareholders.

Whatever you decide to invest your excess cash in, just remember to update this information in your cash flow forecast, so you can see the long term impact that this would have on your business.

3. Use the cash flow to create additional “What if” scenarios

If you have some ideas for the business to take a new direction, it is key to create a “what if” scenario as part of your strategic planning. 

Here are some ideas of what you may use a “what if” scenario for:

  • Taking on additional employees
  • Investing in a new premises
  • Adding a new service or product to the businesses offering.

You will want to create a duplicate of your original cash flow forecast and add in all the impacts that this new direction will create. You can then compare the original scenario with the “what if” scenario to see how your cash will be affected.

4. Track your spending and if it’s in line with your expectations

When you are constantly updating or reviewing your cash flow forecast, you will get a good handle on what the business is spending cash on and how much.

It’s very easy in this digital age to get disconnected from your company’s cash flow, especially as your business grows and the number of bank transactions increase.

Below are a few insights a cash flow will provide you:

  • Unnecessary overspend on costs
  • Those large irregular costs
  • Price increases from suppliers.

Getting these insights quickly allow you to keep your finger on the pulse and make changes quickly to ensure the company’s cash remains healthy.

5. Manage late payers

Late payers are one of the biggest reasons for actual cash being behind the plan of the cash flow forecast. In an ideal world all your customers would pay on time, but unfortunately this is rarely the case.

A key benefit of a cash flow forecast is that you will quickly know who are your consistent late payers and you can plan for this.

Below are a few actions you can take to deal with late payers:

  • Implement penalties for late payments
  • Implement incentives to pay early, such as a settlement discount
  • Reduce their credit limit.

If you have certain customers which continually pay late, remember to adjust your cash flow to line up when you realistically will get the cash from them, so the forecast is as accurate as possible.

How to build a cash flow forecast

 

The starting point for building your cash flow forecast is the same for either your 12-month forecast or your 13-week forecast. Below is a list of the things you need to get started:

  • Closing bank balance of the day before the start of your cash flow forecast
  • A spreadsheet tool to build the forecast in, I would recommend either Google Sheets or Microsoft Excel
  • Details of all your regular payments in and out
  • A list of current money that is owed to you and when it’s due
  • A list of current money you owe and when it’s due.

I would then lay out your cash flow in the following way:

Period (week/month)P1P2P3Etc.
Opening Bank Balance£5,000£1,200£3,900etc.
Collections£2,700£4,300£7,900etc.
Payments£6,500£1,600£3,200etc.
Net Cash Flow-£3,800£2,700£4,700etc.
Closing Bank Balance£1,200£3,900£8,600etc.

 

As you can see, you get a very quick overview of where your closing cash will be for each period in this summary cash flow. It is highly recommended that behind the summary, you have a more detailed list of collections and payments. 

Here are a few examples of collections:

  • Sales
  • Debtors (money owed from prior customer sales)
  • Grant income
  • Loans.

And a few examples of payments:

  • Purchases
  • Rent
  • Wages
  • Taxes.

Your lists are likely to be much longer than this and it’s important nothing is missed to ensure the cash flow forecast is as accurate as possible.

One final tip is to make sure the cash flow forecast is updated at the start of each new period to make sure the forecast is rolling. For example your 13-week forecast should be updated every week, ideally on the first working day of the week, so you have as much financial clarity as possible.

How to leverage technology to cash flow forecast.

Keeping a cash flow forecast up to date in a spreadsheet can be a lot of manual work, so it may be worth looking at an app to do this for you.

If you are using a cloud accounting software such as Xero, you can easily integrate this with third party apps to generate a cash flow forecast automatically. 

Here are a few apps you can look at:

Once you have a cash flow forecasting app integrated with your cloud accounting software, it’s essential to make sure that your books are as up to date as possible to ensure accuracy.

You can then use the third party app to make tweaks to the forecast as you will have knowledge that the software won’t know, such as payment plans you have just agreed, planned new expenditure and late payment dates from conversations with customers.

Next steps

 

As you can see there are many benefits to a cash flow forecast and it’s an essential tool every business owner should have. I hope you found this article helpful for implementing a cash flow forecast into your business.

Which forecasting option will you choose for your business?

Do you need any additional help with getting your cash flow forecast together?

Let me know by getting in touch below 😀

    Karl Newman

    Author Karl Newman

    Hi! I'm Karl. I'm the founder of Direct Peak, a 100% Xero cloud accounting firm. I help business owners get complete financial clarity giving them decision making confidence.

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